CHAPTER 1

What Is Strategy and

Why Is It Important?

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 Learning Objectives
This chapter will help you understand:
1. What we mean by a company’s strategy and why it
needs to differ from competitors' strategies.
2. The concept of a sustainable competitive advantage.
3. The five most basic strategic approaches for setting a
company apart from its rivals.
4. That a company’s strategy tends to evolve.
5. What constitutes a viable business model.
6. The three tests of a winning strategy.

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 What Do We Mean By Strategy ?

A company’s strategy is the

coordinated set of actions that its
managers take in order to outperform
the company’s competitors and
achieve superior profitability.

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 All Businesses Face Three Central Questions
1. What is our present situation?
• Industry conditions and competitive pressures, market standing,
competitive strengths and weaknesses, and future prospects in
light of changes taking place in the business environment
2. What should the company’s future direction be and what
performance targets should we set?
• What buyer needs to try to satisfy
• Which growth opportunities to emphasize?
• Where to head and what outcomes to strive to achieve?
3. What’s our plan for running the company and achieving
good results?
• Challenges managers to craft a series of competitive moves and
business approaches—henceforth called a strategy—for heading
the firm in the intended direction, staking out a market position,
attracting customers, and achieving the targeted outcomes

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 Strategy Is about Making Choices
Strategy is all about choosing How:
• How to position the firm in the marketplace
• How to attract customers
• How to compete against rivals
• How to achieve the firm’s performance targets
• How to capitalize on opportunities to grow the business
• How to respond to changing economic and market
conditions

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 Strategy Is about Competing Differently
Strategy as a choice:
• Is deciding to compete differently from rivals—
pressuring rivals by doing what they do not do or,
even better, doing what they cannot do.
• Guides the company in what it must do and also in
knowing what it must not do.
• Is successful when its actions, business approaches,
and competitive moves appeal to buyers in ways that:
• Set it apart from its rivals by either providing products with
higher perceived values or efficiently producing at lower costs.
• Stake out a market position that is not crowded with strong
competitors.

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 FIGURE 1.1 Identifying a Firm’s Strategy–What to Look for

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Illustration Capsule 1.1 Apple Inc.: Exemplifying a
Successful Strategy
Key elements of Apple’s successful strategy are:
• Designing and developing its own operating systems,
hardware, application software and services.
• Continuously investing in R&D and frequently
introducing products.
• Strategically locating its stores and staffing them with
knowledgeable personnel.
• Maintaining a quality brand image, supported by
premium pricing.
• Committing to corporate social responsibility and
sustainability through supplier relations.
• Cultivating a diverse workforce rooted in transparency.
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 Strategy and the Quest for
Competitive Advantage
Competitive advantage:
• Requires meeting customer needs either more effectively (with
products or services that customers value more highly) or more
efficiently (by providing products or services at a lower cost to
customers.)
Sustainable competitive advantage requires:
• Giving buyers lasting reasons to prefer a firm’s products or
services over those of its competitors.
• Developing expertise and long-term competitive capabilities that
cannot be readily overcome.
• Putting the constant quest for sustainable competitive advantage
at center stage in crafting your strategy.

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 Basic Strategic Approaches (1 of 2)

Strategies for Building Competitive Advantage

Low-Cost Focused
Provider Differentiation
Focused Low- Broad Differentiation
Cost

Best-Cost Provider

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 Basic Strategic Approaches (2 of 2)
Low-cost provider strategy—achieving a cost-based advantage over
rivals
Broad differentiation strategy—differentiating the firm’s product or
service from rivals in ways that appeal to a broad spectrum of buyers
A focused low-cost strategy—concentrating on a narrow buyer
segment (or market niche) by having lower costs to serve niche
members at a lower price
Focused differentiation strategy—concentrating on a narrow buyer
segment (or market niche) by offering buyers customized attributes that
meet their specialized needs and tastes better than rivals’ products
Best-cost provider strategy—giving customers more perceived value
for their money by satisfying their expectations on key quality features,
performance, and/or service attributes that match or exceed their price
expectations

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 Why a Company’s Strategy
Evolves over Time
Managers modify strategy in response to:
• Changing market conditions.
• Advancing technology.
• Fresh moves of competitors.
• Shifting buyer needs.
• Emerging market opportunities.
• New ideas for improving the strategy.

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 FIGURE 1.2 A Company’s Strategy Is a Blend of Proactive
Initiatives and Reactive Adjustments

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 A Company’s Strategy Is Partly Proactive
and Partly Reactive
Realized (current) strategy is a blend of:
• Proactive (deliberate) strategy elements that include
planned initiatives to improve the company’s financial
performance and secure a competitive edge.
• Reactive (emergent) strategy elements developed on
the fly in response to unanticipated developments and
fresh market conditions.
• Abandoned and superseded strategy elements that no
longer fit with the company’s ongoing strategy.

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 Just for Fun
Using the terms shown in Figure 1.2, explain why
U.S. football teams get four downs to make a first
down.
How does risk affect play selection (reactive
strategy) as a team fails to advance on each of its
four downs? What would be the risk effect of
requiring more than a 10-yard gain for achieving a
first down?
What rules of play in other sports (e.g., soccer)
affect how the basic principles of strategy are
applied to game play?

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 A Company’s Strategy and Its Business Model

How the firm will make money:

• By providing customers with value
• The firm’s customer value proposition
• By generating revenues sufficient to cover costs and
produce attractive profits
• The firm’s profit formula
It takes a proven business model—one that yields
appealing profitability—to demonstrate viability of
a firm’s strategy.

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 The Relationship Between a Company’s
Strategy and Its Business Model

REALIZED BUSINESS
STRATEGY MODEL
Competitive Initiatives Value Proposition
Business Approaches Profit Formula

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 Business Model Elements:
The Customer Value Proposition
The customer value proposition is:
• Satisfying buyer wants and needs at a price customers
will consider a good value.
• The greater the value provided (V) and the lower the price (P),
the more attractive the value proposition is to customers

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 Business Model Elements:
The Profit Formula
The profit formula:
• Creates a cost structure that allows for acceptable
profits, given that pricing is tied to the customer value
proposition.
V – the value provided to customers
P – the price charged to customers
C – the firm’s costs
• The lower the costs (C) for a given customer value
proposition (V–P), the greater the ability of the
business model to be a moneymaker.

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 FIGURE 1.3 The Business Model and the Value-Price-Cost
Framework

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 Is The Company’s Strategy A Winner?

EXHIBITS GOOD
FIT WITH
THREE SITUATION

TESTS OF A RESULTS IN
COMPETITIVE
WINNING ADVANTAGE

STRATEGY PROMOTES
SUPERIOR
PERFORMANCE

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 What Makes a Strategy a Winner?
A winning strategy must pass three tests:
• The fit test
Does it exhibit good fit with the external and internal aspects of
the firm’s dynamic situation?
• The competitive advantage test
Is it likely to result in a sustainable competitive advantage?
• The performance test
Is it producing superior performance, as indicated by the firm’s
profitability, financial and competitive strengths, and market
standing?

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 Illustration Capsule 1.2 Pandora, Sirius XM, and
Broadcast Radio: Three Contrasting Business Models

Who listens to the radio anymore?

• How sustainable are the business models of Pandora,
Sirius XM and over-the-air broadcasters over the long
term?
• Given the changes in user listening habits, which
competitor’s present strategy best passes the three
tests of a winning strategy?
• What internal and external factors will create particular
difficulties for each competitor in changing its strategy
or business model?

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 Why Crafting and Executing Strategy Are
Important Tasks
Strategy provides:
• A prescription for doing business.
• A road map to competitive advantage.
• A game plan for pleasing customers.
• A formula for attaining long-term standout marketplace
performance.
Good Strategy + Good Strategy Execution =
Good Management

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Applying What You Learned in This Chapter
Google’s browser-based Chrome operating system
and its online applications suite are challenging
Microsoft’s long-term dominance of the office
productivity application marketplace sectors.
What should be Microsoft’s near-term response to
this competitive challenge?
How will Microsoft’s long-term response to this
competitor’s actions affect its business model?
Which competitor’s strategy will likely be the eventual
winner in the marketplace? Why?

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 The Road Ahead
Strategy is about asking the right questions.
• What must managers do, and do well, to make
a firm successful in the marketplace?
Strategy requires getting the right answers
• Good strategic thinking and good management of the
strategy-making, strategy-executing process are
important.
• First-rate capabilities and skills in crafting and
executing strategy are essential to managing
successfully.
Welcome and best wishes for your success!

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